Oil prices face a day of reckoning as the U.S. decides whether it will remain in the Iranian nuclear accord, and the realization is that due to underinvestment in oil it might be difficult to replace Iranian oil if it is taken off the market. What also is clear the market is going to be more sensitive to disruption as the biggest oil glut in mankind’s history is now just a memory. The breakout $70 a barrel is not a fluke, but has been building as global demand exceeded exceptions and the false mantra of lower for longer oil prices turned out to be a fantasy.

It is also unclear whether Saudi Arabia will act to make up for the loss of Iranian oil supply. It is being reported by Bloomberg that Saudi Arabia’s former price doves on oil now want prices near $80 a barrel and former Price hawk Iran want staple prices in the $60 a barrel range. We have heard this before, but it comes at a critical time as the showdown with the U.S., and the high likelihood that there will be new sanctions on Iran, means that the global oil market will be caught short. Saudi Arabia is really the only country with sufficient spare capacity to make up for the loss of Iranian oil and they might not be in a hurry to act because they want $80 a barrel.

If you look at OPEC, compliance is the best it has ever been. It was reported last week that OPEC compliance hit a new record high of 162 percent as the cartel pumped 32.12 million barrels per day this month, the survey found, down 70,000 bpd from March. The April total is the lowest since April 2017, according to Reuters surveys.

In April, the biggest decrease in supply came from Venezuela, where the oil industry is starved of funds because of economic crisis. Output dropped to 1.50 million bpd in April, the survey found, a new long-term low.

Production in Angola, where natural declines at some fields are weighing on output, slipped and the country is pumping over 260,000 bpd less than its OPEC target. Nigerian exports, which have risen this year, slipped in April. Production in Libya, which remains unstable due to unrest, edged lower after a suspected act of sabotage briefly stopped flows from Waha Oil Co.’s fields, industry sources said according to Reuters.

Even though some of the decline was due to unintended problems, the reality is that the market badly misjudged OPEC’s resolve to erase the world of the oil glut. Like I said before, this is not your daddy’s OPEC. Venezuela is collapsing, helping that compliance number. Reuters reports that U.S. oil firm ConocoPhillips (NYSE:COP) has moved to take key Caribbean assets of Venezuela’s state-run PDVSA to enforce a $2 billion arbitration award, actions that could further impair PDVSA’s declining oil production and exports.

Shale oil production is on the rise, but shale producers do not have the ability to quickly erase production. Logistics and bottlenecks make that impossible. Even as we saw the U.S. rig count surge. Baker Hughes reported the number of active U.S. rigs drilling for oil rose by 9 to 834 this week. The oil-rig count had logged gains in each of the last four weeks. The total active U.S. rig count, which includes oil and natural-gas rigs, climbed by 11 to 1,032, according to MarketWatch.

U.S. gasoline and product prices will also rise. Make sure your hedges are in place. Natural gas is under pressure as U.S. production surges.

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